Gold price drops to 7-week low on Fed rate hike prospects

London (May 25)  Gold fell to a seven-week low on Wednesday after upbeat U.S. home sales data in the previous session boosted expectations that the Federal Reserves will press ahead with interest rate hikes in the near term.

The metal has fallen more than 4 percent since Fed meeting minutes last Wednesday revived expectations for an imminent rate increase. Gold is sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding assets.

"It all does hinge on the Fed's intentions for June," Mitsubishi analyst Jonathan Butler said.

"We had surprisingly hawkish minutes last week which put the June rate rise back on the cards. That certainly has made life tough for gold, because the dollar's rallied, 2-year Treasury yields have rallied, even 10-year yields have rallied somewhat."

Spot gold was down 0.47 percent at $1,220.66 an ounce, off an earlier low of $1,220.24. U.S. gold futures for June delivery were down $8.10 at $1,221.10.

The dollar hit a two-month high against a basket of currencies on Wednesday on expectations the Fed will raise rates in the near term, though it gave up gains against the euro on relief that there was progress in Greek bailout talks.

Growing confidence in a pick-up in U.S. economic growth had a boost on Tuesday as data suggested new U.S. single-family home sales have hit the highest in eight years.

Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 3.9 tonnes on Tuesday to 868.66 tonnes, its first decline in a month.
Why the Fed might not be able to put a stop to gold's  run

Price-sensitive gold buyers in Asia were active overnight, but were unable to consistently lift prices.

"As expected Chinese investors in the opening hour were eager buyers..., happily taking advantage of the lower prices," MKS said in a note. "The premium on the exchange reflected this ...trading around $2.00-3.00 over the loco London gold price for onshore traders."

Elsewhere data from the International Monetary Fund showed regular official sector gold buyers China, Russia and Kazakhstan raised their bullion reserves again last month, while Venezuela sold off more of its holdings earlier this year.

Source: CNBC